Our investment approach
Our approach to investing is deceptively simple. We buy good, undervalued businesses and hold them until the market fully recognizes their potential.
The EdgePoint way to invest
We're long-term investors in businesses. We view a stock as an ownership interest in a company and endeavour to acquire these ownership stakes at prices below our assessment of their true worth.
We believe that the best way to buy a business at an attractive price is to have an idea about the business that isn't widely shared by others – what we refer to as a proprietary insight.
Proprietary insight is a fancy way of saying that we look for positive changes inside a business before they become obvious to others.
We strive to develop proprietary insights around businesses we understand. We focus on companies with strong competitive positions, defendable barriers to entry and long-term growth prospects that are run by competent management teams. These holdings generally reflect our views looking out more than five years. We firmly believe that focusing on longer periods enables us to develop proprietary views that aren't reflected in the current stock price.
Our approach is deceptively simple. We buy good, undervalued businesses and hold them until the market fully recognizes their potential. Following this approach requires an ability to think independently, a natural curiosity necessary to search out new ideas and a commitment to embrace the thorough research required to uncover opportunities the market doesn’t fully appreciate.
Our investment approach video
At EdgePoint, we believe the most valuable thing about us is the application of our investment approach. Our primary goal is making money for you and your clients, but pleasing returns over the long term are more likely if you understand and believe in the EdgePoint investment approach. We hope this short video will help explain our process and act as a helpful reminder when your beliefs are tested.
How do we come up with ideas?
We do the research you'd expect us to do. We often follow a company for years before investing. We study financial statements, interact regularly with different levels of the company’s management team, perform competitive industry analysis, attend industry-specific conferences, consult with industry experts, and read volumes of information about the company, its competitors and the industry in which it competes. At times, we're able to connect various pieces of such information into an idea generally not understood by others.
Are we a “Value” or a “Growth” manager?
We invest in an idea only when we can buy an interest in a business below our assessment of its true worth. By definition, we're considered “value” investors. However, in addition to value, we want businesses capable of growing their value over time. This, by definition, makes us “growth” investors. At EdgePoint, we want to buy “growth” companies at “value” prices.
What is our investment time horizon?
We're long-term investors in businesses. Generally, our investments reflect our view of a company's prospects looking out more than five years. Focusing on longer periods enables us to develop unique views often not reflected in the current stock prices of the businesses we're studying. Fortunately, most market participants focus on the short term: what's just happened, what’s currently happening and what's about to happen. This difference provides an opportunity for EdgePoint to add value.
How do we blend conviction with caution in building a portfolio?
We invest with conviction. As a result, our portfolios are concentrated in our best ideas. This concentration allows individual portfolio holdings to have a meaningful impact on returns when the market recognizes our estimate of their value.
This often allows us to have more in-depth knowledge about the companies we own. Thoroughly understanding a company helps to reduce the potential risk of an investment.
Although our portfolios are concentrated, they're diversified by business idea. Each investment is based on a well-researched proprietary idea. Our investment managers go to great lengths to ensure that the collection of businesses in the portfolios isn't based on the same or similar ideas. Thus, our portfolios – while concentrated – are diversified.
How do we approach risk?
Investment success is often defined exclusively by investment returns. However, when we invest, we weigh the risk of that investment against its potential return. We believe that most investors focus exclusively on returns and neglect to ask what kind of risk was taken to achieve those returns.
We believe that risk in the investment business is the potential for permanent loss of capital. We take an old-fashioned view of risk summed up in the questions, “How much money can we lose, and what is the probability of that loss?” Much of our thinking around risk focuses on company-specific factors such as increased competition, management competence, profitability compression and the business's underlying valuation relative to our assessment of its true worth. Noticeably absent from our definition of risk is volatility of a company’s share price relative to the market. We don't believe volatility is risk.
When do we sell a business?
We sell a security for one of two reasons. First, if our thesis about the company is deemed no longer valid. If we can no longer stand behind our thesis, we can no longer stand behind an ownership interest in the business and the position is sold. Second, there's a constant culling process whereby we continuously strive to upgrade the quality of our portfolios with better ideas. For example, if one of our ideas becomes well recognized and this is reflected in its share price, it's removed in favour of a more attractive opportunity.
How do we approach Responsible Investing?
We approach responsible investing by considering environmental, social and governance (“ESG”) factors in our fundamental research on a business to identify potential risks and opportunities from our stake in that business. Overlooking ESG issues would hamper our ability to compound long-term wealth, our ultimate fiduciary duty. ESG factors are, however, one of many considerations taken into account by us. ESG factors are not determinative in our investment decision-making process and are considered to a limited extent. We take a holistic approach and don’t employ a hierarchy of investment considerations.
Download EdgePoint’s Responsible Investing policy to learn more.